2013 was a hallmark year for modern grocery retail in Romania, marking a series of firsts on the local market: the first year in which modern trade surpassed traditional retail in value share of sales, the opening of the 1,000th modern retail chain store, the first launch of an online order and home delivery platform for grocery sales by a major retailer, and the first signs of consolidation on the retail market with Auchan having taken over 20 of Metro Group’s Real Hypermarket stores in the country.
In a challenging market, still feeling the weight of the economic downturn, most modern retail chains continued their expansion, largely at the expense of small independent retailers. Although macroeconomic forecasts do not indicate a rapid recovery yet, modern retail will continue to grow as there is still some distance to be covered before catching up with mature markets in both CEE and Western Europe.
Several trends will continue to underpin this expansion, as confirmed by evolutions in 2013: large chain retailers will increasingly gain market share in the convenience segment, previously reserved for traditional trade; as retailers continue to expand their reach, private labels will follow, growing in relevance and sales; finally, the launch of online ordering services will open up new avenues for consumers.
Overall market developments
Grocery retail trade in Romania stood at around EUR 14bn in 2013, a year when private consumption registered a modest increase of 0.4%, following growth of 3.3% in 2012 and a decrease of 17% over 2009-2011. Retail trade in Romania suffered heavily throughout the economic crisis as personal income decreased and consumption plummeted.
Modern trade however continued to outperform the market, managing to gradually increase its share in total grocery retail sales from below 40% at the onset of the crisis, to a new maximum of 53% in 2013 (Figure 1), driven by continued expansion of large retail chains, with Kaufland, Lidl and Mega Image at the forefront of sales growth.
But despite progress in past years, Romania still exhibits a lower degree of retail penetration compared to other CEE and EU countries, indicating there is still significant potential for future growth. At around 90 m² of modern retail surface per ‘000 inhabitants, Romania lags even behind Bulgaria, with 140 m² per ‘000 inhabitants, while in Hungary, Poland or the Czech Republic the figure stands above 250 m²/ ‘000 inhabitants (even around 400 m²/ ‘000 inhabitants in the case of Hungary). It is therefore not a surprise that the modern trade penetration ratio, although now up to 53% of all retail trade, is significantly below the level of EU countries and is still lower than for CEE peers where penetration exceeds 70-80%.
One of the major limiting factors for the expansion of modern trade remains the high share of population living in rural areas (46% according to the latest census figures). Rural largely remains ignored by modern retailers as logistical complexity and local factors (such as the common habit of traditional retailers to sell on debt to clients they know well) reduce attractiveness for modern retailers. However, even this threshold is now being crossed – the first sign was Metro’s development of the La Doi Pasi franchise (a hybrid of modern and traditional trade), which reached over 300 stores in rural areas (out of a total of around 700). And now Carrefour launched its own retail format targeting rural households – Carrefour Contact – having already opened 6 stores.
Three trends that will accompany modern retail’s development in Romania
1. CONVENIENCE IS THE NEW BATTLEGROUND
Modern trade began its expansion in Romania through large formats – Metro was the first international chain to enter the market, with its first cash & carry store opened on the outskirts of Bucharest in 1996; large hypermarket chains soon followed. Retailers attracted Romanian shoppers with affordable prices and a wide choice of products available in large retail outlets.
In recent years however, retailers have shifted expansion efforts to segments largely ignored in the past: supermarkets and convenience stores. The trend is driven in part by a relative lack of competition in the format (so far), but also by an increasingly relevant shoppers’ need for smart convenience, as time scarcity and pressure on work life balance mean that an increasing share of consumers now put more emphasis on the ability to buy the things they want in the quickest and most efficient manner.
Modern retailers are now competing even in the convenience segment, reserved in the past for traditional retail stores or smaller scale chains run by local entrepreneurs. Mega Image, Carrefour and Profi are all expanding in the segment through franchises. Mega Image already has more than 120 partners in its Shop & Go franchise, while Carrefour has also drawn in over 50 franchisees under its Express brand.
Metro is also present in this segment, but through an approach more inspired by its traditional role as a partner for entrepreneurs. Its La Doi Pasi convenience franchise, launched in 2012, now counts over 700 partners who, as opposed to the other existing franchises, enjoy significant operational independence, receiving advisory services from Metro, marketing support and access to the cash & carry chain’s purchasing network. Significantly, the La Doi Pasi franchise is the first meaningful venture of modern retail in rural areas, where around half of its stores are currently located. The initiative is similar to those in neighbouring countries, where large scale franchises or cooperatives attract a large number of independent retailers under a single brand.
As new openings are located closer to consumers, average sales area for new stores opened throughout the year has decreased from around 3.000 m² at the height of the retail boom (2005-2007) to just around 500 m² in 2013. Supermarket and convenience stores openings continue to accelerate – out of a total of 263 openings in 2013, 225 were supermarket or convenience stores. Currently, these account for 57% of the stock of modern stores in Romania (or 73% when including La Doi Pasi franchisees). Expansion has largely come about through absorbing existing traditional retailers (sometimes even whole chains), either through outright acquisitions or through integration in franchise networks.
International benchmarks seem to confirm that the expansion of the proximity segment is likely to continue at the same pace for some time, as Romanian modern trade retailers operate only around 26 supermarkets/ million inhabitants compared to an average of around 65 supermarkets/ million inhabitants in other CEE countries (Bulgaria, Poland, Czech Republic and Hungary). The difference is even more striking in the convenience segment, where only around 45 modern trade stores/ million inhabitants operate in Romania, ten times less than the average in the same four CEE countries (figures including La Doi Pasi and similar franchises in other countries).
A similar comparison indicates that the hypermarket segment is close to reaching full potential in Romania (although expansion in the intermediate superstore format of Kaufland is set to continue), while cash & carry is at comparable levels even with Western European countries. The discount segment is still in a growth phase, spurred largely by Lidl’s relatively recent entry into the market, as penetration remains far from the European average.
It seems that all retailers are adapting their strategies and following the trend towards smaller formats. Auchan’s new store openings have been mostly of smaller format Auchan City, less than half the size of the retailer’s regular hypermarkets, while Carrefour has slowed down hypermarket expansion in the past two years (although it plans new openings for 2014), focusing more on the supermarket and convenience segments. Even in the cash & carry segment, expansion was driven almost exclusively by smaller Metro Punct stores.
While hypermarkets retain their leadership of the retail market (with over a quarter of all retail sales, compared to around 15% for supermarkets and convenience combined), supermarkets and convenience stores are set to increase their share as many retailers’ expansion plans focus on this segment.
2. PRIVATE LABELS CONTINUE TO GROW IN IMPORTANCE
Smaller formats cater to shoppers’ need for convenience, but a large share of consumers continues to value low prices above all. Already very price conscious, the economic downturn further influenced consumer behaviour in Romania, as shoppers increasingly look for good deals, going to stores once every 2-3 days while lowering the average value of their grocery basket in one visit.
In this context, it comes as no news that private labels have been growing in importance. From a mere 1% of total grocery retail sales a decade ago, the share of private label products has increased to 12% in 2012 and now 15% in 2013, driven by consumers’ search for value and retailers’ increased investments in the segment. The accelerated expansion of discount stores in past years has also fuelled private label penetration – whereas for most hypermarkets and supermarkets private labels account for 10-15% of sales, for discounters the figure can be as high as 70-80%.
Up to a quarter of consumers now declare that the private label offering is an important criteria when choosing a retailer. And although over two thirds choose private labels for their low prices, around a third also place high value on the quality guarantee provided by a retailer’s brand or simply prefer specific private label products to their brandname alternatives.
Private labels not only cater to consumers’ needs, they are also an attractive prospect for retailers. Private label products, our analysis shows, can realize up to 25% higher margins at 15-30% lower retail prices, growing profits rather than revenue. As consumers allocate more of their spending on private label products, these also allow retailers to differentiate themselves, create loyalty and cater to a wide range of needs. Carrefour offers a fine example with its Carrefour Discount, Carrefour Bio, Reflets de France and Quality Sourcing (‘Filiera Calitatii’) lines.
Sophistication of private label lines is already increasing, with improved branding, increases in quality and diversification in niche sub-brands (e.g. bio, ethical) and super-premium spurring future growth. More than ever, constant innovation to meet ever-changing consumer needs will be key for producers wanting to maintain their brands position in the face of private label competition – positioning on price alone is not a likely option.
Overall, the share of private labels in Romanian retail is set to continue its increase, sustained largely by the continued expansion of modern retailers. International comparisons show sufficient room for growth – private labels already hold volume shares of around 30% of retail markets in Poland, Hungary or the Czech Republic. In the UK, they represent 45% of retail volumes, whereas in Switzerland, a long established foothold for private labels, the figure is already above 50% (Figure 2).
3. ONLINE IS BECOMING A MEANINGFUL CHANNEL FOR GROCERY
2013 marked yet another milestone in the evolution of modern grocery trade in Romania as leading retailers Carrefour and Cora both entered the online channel with distinct value propositions (cash & carry chain Metro had also launched an online service as early as 2012, but catering only to business customers with a limited product range). Carrefour took the first step with the launch of its Carrefour Online platform in the spring of 2013, offering home delivery services to customers in Bucharest, in exchange for a delivery fee. Cora followed up in December with the launch of its Cora Drive click-and-collect service – customers order online, but then pick-up their groceries from a Cora hypermarket with no additional fees (the service is currently available at only one Cora location in Bucharest).
Online grocery sales are another means through which modern retail can cater to the needs of mid-to-high income urban
consumers, who value time saving and convenience. And considering the accelerated growth of e-commerce in Romania (over 40% annually over 2006- 2013), a base of online-aware consumers is already developing as research shows that up to 70% of internet users consider the internet to be a very useful purchasing channel.
Still in an early stage, Carrefour and Cora’s services currently feature a more limited range of around 10,000 items (versus an average of 50,000 SKUs available in a traditional brick-and-mortar hypermarket), but there are plans to expand. Carrefour plans to increase the product range to that of a fully-fledged store while extending delivery services to other regions in the country. Cora expects drive sales to account for up to 5% of sales of the Lujerului store in 2014, while also looking to expand the service at other hypermarkets and also offer home delivery services.
By comparison, in France the drive format is responsible for around 2-3% of grocery sales with over 2,000 drive sites throughout the country (more than the number of hypermarkets). Online retailing in the UK, where home delivery is the channel of choice, already accounted for around 4% of total grocery sales. In both countries, the value of online sales is set to double by 2016 (compared to 2012 values). In either case, click-and-collect or home delivery services only provide an additional channel to consumers, who continue to shop in traditional venues as well (albeit less frequently and more often to top up), highlighting the importance of an integrated multi-channel strategy. Consumers seem to leverage online and offline as complementary channels and not as competitive ones.
Still in its early stages, online grocery retailing is set to continue growing in Romania. As more retailers enter the online arena (Mega Image is among those to have announced plans) and existing players expand their offering (both geographically and in terms of product range), a generation of internet and smartphone savvy consumers will take notice and drive sales growth. Retailers will however need to understand and find the best way to address different customer needs, which even online can vary from optimizing shopping efficiency and time spent to simply enjoying the shopping experience. Achieving this will be key to capitalizing on growth opportunities in the channel.
Looking forward
Other trends will accompany modern retailers’ expansion – consumer needs are becoming more sophisticated, providing retailers with ample opportunities to differentiate their value propositions; health, environmental concerns and product sourcing, to name a few, are now more important to an educated audience, leveraging an abundance of information sources. Other needs may be equally important and retailers will need to determine how to individually address different consumers with varying needs (convenience vs. pleasure of shopping; value vs. health; etc.).
In response, retailers will increasinglyleverage the tools at their disposal. Loyalty programs are already becoming more sophisticated, seeking to secure clients in an increasingly competitive market. And in the age of Big Data, valuable insights into the behavior of customers will allow retailers to tailor and optimize their offers to better address consumer needs and generate sales uplift for themselves.
Independent retailers will be increasingly challenged as modern trade continues to expand, even in rural areas. Ultimately, three choices will still be available to them, the most obvious being to join one of the existing modern trade franchises. In neighbouring markets, an alternative exists in the form of cooperatives/ purchasing alliances – by grouping together store owners can obtain significant cost savings in purchasing; the co-op can also provide members with support in marketing and own brands, but such initiatives have yet to make an impact in Romania. Finally, they can remain independent, but they will need to identify and leverage those success factors that will allow them to thrive in the face of intense competition (these could be their relationship with clients, finding unaddressed market niches, either in terms of product offering – local, traditional, fresh products, etc. – or other factors – location, service hours, etc.).
The retail landscape in Romania will continue to evolve – 2014 will see new thresholds crossed as modern retail will continue to expand in a rapidly changing marketplace, with still some way to go before reaching maturity. Consumers will draw a large share of the benefits as retailer’s offerings will adapt to better meet their needs and expectations. Modern retail established its leadership in 2013, but plenty of new developments are in store for the next years.
